Coal India: Good show, awaiting price pooling clarity

Coal India’s stock closed 1.64 per cent higher on the bourses after posting in-line performance for the June 2012 quarter. Revenues grew 14 per cent, while profits were up eight per cent year-on-year. What’s more important for the stock is the recent news regarding revision of penalty clauses in the fuel supply agreements (FSA) with power producers. While the proposed modifications have gone well, the Street is awaiting clarity of price pooling between Coal India and power producers for imported coal (to fulfil the gap in any short supplies).

Analysts believe the higher costs of imported coal will be borne by the power producers, and any negative surprise can result in margin pressure for Coal India. Further, the production and dispatches during September 2012 quarter will be crucial for meeting FY13 guidance. Some analysts say, given the production in the first four months of the current year, there could be some shortfall versus the FY13 targeted production.

For now, they are assuming that Coal India will achieve the target. In this backdrop, most of them are positive on the stock. The consensus target price according to Bloomberg at Rs 385 indicates an upside potential of nine per cent from the current level of Rs 353.

STABLE GROWTH

In Rs crore

Q1' FY13

FY13E

FY14E

Net sales

16,501

67,677

74,462

% change y-o-y

13.8

8.4

10.0

Ebitda

4,815

17,907

19,996

Ebitda (%)

29.2

26.5

26.9

Net profit

4,469

17,032

19,042

% change y-o-y

7.9

15.2

11.8

EPS (Rs)

7.1

27.0

30.1

PE (x)

-

13.1

11.7

E: EstimatesSource: Edelweiss Research

Dispatches pushed by rake availabilityDuring the June 2012 quarter, Coal India’s dispatches were helped by increased availability of railway rakes (wagons for coal supply). As the availability of railway rakes increased to 177 a day in the June quarter from 164 rakes a day during June 2011 quarter, volume offtake through railways increased 11.2 per cent (overall offtake increased 6.4 per cent year-on-year to 113.04 million tonnes or MT). Production for the June 2012 quarter came at 102.47 MT (up 6.4 per cent year-on-year). However, the higher dispatches (compared to production) points to liquidation of inventory.

Q2 will be crucial The past two quarters’ combined production (247.07 MT) and dispatches (235.87 MT) by Coal India suggests that the company has inventory for maintaining dispatches at the higher rate. In this backdrop, Coal India was able to dispatch 36.2 MT during July even as production came at 31.8 MT (lower than the production target of 32.3 MT, according to reports). This has raised some concerns. However, analysts at Daiwa Securities observe that the overall decline in production growth was due to temporary issues at a few subsidiaries, and that growth should normalise in the coming months. Thus, production numbers in the coming months will have to be observed as these will be crucial for Coal India meeting its annual targets for FY13 (462 MT production and 474 MT dispatches). For the September quarter, the company is targeting 96 MT in production and 107 MT in dispatches.

Revised FSA: Pricing clarity awaitedThe revised penalty clauses for the FSA with power producers for base penalty of 1.5 per cent (trigger level of 65-80 per cent) and peak penalty of 40 per cent (supply below 50 per cent) have gone positive with the Street. Analysts at Motilal Oswal Securities believe this is much better than the earlier proposals. Also, given that there is option to import coal to meet any gap between commitment and own production, they do not expect material impact of penalty on Coal India. They add that assuming Coal India supplies 65 per cent of coal from its own production and imports 15 per cent, net profit impact would be just one per cent for FY13 (estimated), and near zero in FY14/15.

However, clarity on the price pooling is awaited. It is generally being assumed that power producers will bear the incremental cost of imports. However, in case Coal India has to share the incremental costs, its margins can get impacted.

Analysts at Citi observe that they are unsure about the modalities given: 1) the impact on varying grades of coal; and 2) resistance from users of domestic coal. They add that Coal India is not likely to subsidise imports and is likely to import only if it has back-to-back contracts with end consumers.

Q1: Good showMeanwhile, the highlight for the June quarter was the effective cost control that helped operating profit margin even as employee costs at Rs 6,130 crore jumped 26 per cent year-on-year. Sequentially though, employee costs fell 33 per cent.

Further, the combined contractual, miscellaneous and overburden removal expenses came lower by Rs 1,719 crore (down 40 per cent sequentially) boosting earnings before interest, taxes, depreciation and amortisation (Ebitda) margins, which increased to 29.2 per cent compared to 19.5 per cent in the March 2012 quarter. In this backdrop, even though June quarter’s revenues were 15 per cent lower on sequential basis, net profit increased 11.5 per cent.

The performance would have been better but for the trend in e-auction. Declining international coal prices led e-auction realisations to decline sequentially. The e-auction realisations at Rs 2,561 a tonne declined 10.2 per cent sequentially, while volumes too were lower 8.4 per cent sequentially (and 0.4 per cent year-on-year).